At Pension Insurance Corporation plc (PIC), which was set up 15 years ago to secure the pensions of the thousands of defined benefit policyholders in the UK, we have been grappling with a number of timely and critical challenges.
The UK’s pension insurance industry is large and growing, with more than £30bn in transactions predicted to have taken place last year, and even more expected this year.
Some believe that this figure could reach £400bn this decade. The responsibility our sector has, to invest in ways that mean we can give defined benefit pension members – who are living longer than ever before – a secure income for life, is significant.
Traditionally, low risk assets such as UK government and publicly traded high grade corporate bonds have been the best answer. But in an increasingly low yield environment, it has been vital that investors like PIC look elsewhere to generate the long-term returns we need.
The best answer is to invest in assets that have a wealth of social value as well as attractive risk-adjusted returns. This is because what makes sense for society can also help us achieve our long term aims. From social housing to renewable energy, these are the types of assets that can help government to raise productivity from its current slump, meet its levelling up agenda and deliver against COP6 commitments. They also happen to be the essential infrastructure of which the country desperately needs much more.
These types of long-term infrastructure projects or assets suit our needs because they give us the ability to generate specific cashflows that match our pension liabilities in years when cashflows from listed bonds are hard to source. But the set up also allows borrowers to access finance flexibly and work closely with a partner that is as committed to the long-term success of a project as they are.
They also give us the opportunity to price more competitively and provide assurance to trustees that the money they handover is being used in sustainable and socially valuable ways, as well as being in the best interest of our policyholders.
And, by investing this way, we also play a role in a cycle of intergenerational transfer. Why wouldn’t we want to use these assets to invest in and help regenerate the local communities in which they were earned? And wouldn’t it be a good thing if we could help younger generations achieve their ambitions and boost the quality of their lives by using pensions to create jobs, upgrade university facilities, move the energy mix towards carbon-neutral sources and develop high-quality homes for families?
All of this means that the question of which assets we can invest in is critical – not only for trustees and policyholders, but for the entire country.
If we take the £400bn figure I have already mentioned, if roughly 20% of this was invested into long term social assets – as is the current make up in our portfolio – this could mean an investment of around £80bn in the UK economy over this period.
But this solution is not without its challenges. Investors’ ability to work closely with infrastructure providers, including those in the social housing sector and companies in renewable energy, is being hampered by two structural issues.
Firstly, insurance sector regulatory restrictions mean that we cannot easily invest in as many of these assets as we would like. And secondly, an inconsistent approach to UK infrastructure planning makes it difficult to take advantage of opportunities to invest.
Greater regulatory flexibility combined with greater policy stability will help protect our pensioners and boost the economy through investment in sustainable social infrastructure.
PIC has already invested almost £11bn in assets including social housing, renewable energy and the UK’s universities – but we want to do so much more. There are more than £2trn of pension liabilities currently sitting on corporate balance sheets.
It is simply a myth that there is not enough money to fund the infrastructure projects the UK needs. The assets exist, but cash is currently constrained – and it is vital that the government acts now to unlock a unique opportunity.
